The COVID-19 pandemic has created a great deal of emotional and financial stress. It has also generated a far higher demand for charitable action. If you can continue donating during this difficult period, the CARES Act offers some encouragement and relief to donors, whether you can give thousands or just a few bucks.
From an income tax perspective, the CARES Act has expanded charitable contribution deductions. Individual taxpayers who don’t itemize can take advantage of a new above-the-line $300 deduction for cash contributions to qualified charities in 2020, in addition to your standard deduction. “Above-the-line” means the deduction reduces your adjusted gross income (AGI).
For larger donors, the CARES Act has eased the limitation on charitable deductions for cash contributions made to public charities in 2020, boosting it from 60% to 100% of AGI. There’s no requirement that your contributions be related to COVID-19.
To be able to claim a donation deduction, whatever the size, you must give to a qualified charity. You can check a charity’s eligibility to receive tax-deductible contributions by visiting the IRS’s Tax-Exempt Organization Search.
If you’re making a large gift, it’s a good idea to do additional research on the charities you’re considering so you can make sure they use their funds efficiently and effectively. The IRS tool provides access to detailed financial information about charitable organizations, such as Form 990 information returns and IRS determination letters.
Even if a charity is financially sound when you make a gift, there’s no guarantee it won’t suffer financial distress, file for bankruptcy protection or even cease operations down the road. The last thing you likely want is for a charity to use your gifts to pay off its creditors or for a purpose unrelated to the mission that inspired you to give in the first place.
One way to manage these risks is to restrict the use of your gift. For example, you might limit the use to assisting a specific constituency or funding medical research. These restrictions can be documented in a written gift or endowment fund agreement.
Charitable giving is more important now than ever before. Contact us for help allocating funds for a donation and understanding the tax impact of your generosity.